They're a one-stop investment supermarket, a sort of Aldi of managed funds.

With fees of only a fraction of 1 per cent and the promise of faithfully following the average return of whatever financial asset you're after, it's no wonder exchange traded funds (ETFs) have taken off.

They're worth $10.3 billion, and most of that is DIY super money. Since they trade on the sharemarket no differently to ordinary shares, you can buy as few or many units as you want. You can also sell some or all of them should you suddenly need the cash or want to take a profit. Brokerage is the same as for shares.

Australian ETF products.

Their huge appeal is in getting so much for so little.

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Fancy a share of the top 200 stocks in one buy? There's an ETF for that, or the top 20 bank or resource stocks, or franked dividends. Heck, there's even an ETF if you think the market is going to fall, with the apposite ASX code of BEAR issued by BetaShares, a provider of ETF products. The more the market drops, the higher its price goes. Unfortunately the reverse applies in a bull market.

Global stocks? Now you're talking - that's where ETFs come into their own.

Michael Hamm is shifting from trading global shares and futures to exchange traded funds, which he believes are a safer bet. Photo: Danielle Smith

And would you like a bond portfolio with that? After all, everybody says you need to be diversified and there are 10 different ETFs for bonds.

Why stop there? Property, commodities, other currencies, corporate bonds … you name it, there'll be an ETF for it. In fact there are 98 to choose from.

Collecting different ones makes sense too. It gives you instant diversification, the only surefire way of protecting yourself from market swings and roundabouts.

Vishal Teckchandani lost money on an ETF when it suddenly folded. Photo: Andrew Quilty

The nearest thing to an ETF is an unlisted managed index fund but it won't be as easy to get in or out of, and will have a higher annual management fee.

Nor are these new-fangled ETFs the same thing as listed investment companies (LICs), which seem to have been around forever.

One difference is that share-based ETFs passively follow an index - though that's starting to change (which I'm coming to) - while LICs actively choose stocks, and so at times dispose of them as well.

Perhaps the most striking difference is that an ETF must trade at exactly the value of its holdings whereas for years after the 2007 sharemarket peak, LICs traded at a discount. Many are now at a premium, making them hard to justify as an investment.

How can that happen? Because LICs depend on the market mood at the time, while ETFs have a special mechanism to keep them in line.

Sure, an ASX-linked ETF will drop as the market drops, and by the same amount, but it can't drop further.

The secret is market makers who make their money by exploiting any difference in the underlying and traded value of an ETF. They're even commissioned by the issuers of ETFs.

But what if they go AWOL? They can't because their presence is a condition of listing. If that doesn't sound altogether convincing, remember it's profitable for them. Ah, that's better.

"Market makers are in the business of providing liquidity. They clip the ticket on every transaction on both sides," says Alex Vynokur, managing director of BetaShares.

They don't even have to speculate. It's a one-way bet for them - the fact somebody is buying or selling is all that counts. ETFs are open-ended so market makers know stocks will be created or redeemed for them. So for them just doing something is enough.

That said, ETFs aren't all sweetness and light. Unless they reach and hold a critical mass they can be delisted as some investors have already found to their cost (see Vish Teckchandani's case).

Another risk is that some ETFs are moving closer to active management, trying to get around the problem that more than half the sharemarket is BHP Billiton and the banks, which isn't all that diversified.

A new fund from Market Vectors, Australian Equal Weight (MVW) holds 1.3 per cent of each of its 77 stocks, which it chooses independently of the index. It would have out-performed the ASX200 by 3 per cent a year during the past five years, says managing director Arian Neiron.

A variation on this theme is QOZ issued by BetaShares. It weights stocks according to their "economic footprint" rather than their market value. This gets around the problem of "overweighting overvalued securities and underweighting undervalued securities", Vynokur says. After its 0.29 per cent annual fee it would have beaten the ASX200 in 12 of the past 15 years.

UBS has gone further. Its ETF - with the coveted ASX code of ETF - only buys its brokers' recommended stocks, but charges a higher annual fee of 0.7 per cent.

The 102,500 investors in ETFs seem happy and 70 per cent will buy more in the next 12 months, according to Investment Trends.

Low fees appeal

Trading global shares and futures until three or four in the morning has been an adrenalin hit for Michael Hamm, 30, but he says there are safer and better ways of making money.

Previously, he'd trade up to 20 times a day but this has been culled to less than five as he shifts to exchange traded funds (ETFs) which demand to be kept for three to five years rather than three to five hours.

''I like the flow of the markets but it's not just strictly to make money,'' Hamm says.

While he still trades to ''add value'' to his portfolio he's been won over by ETFs, which he began using to trade commodities.

He prefers the US-based ones because they're more affordable and in some cases can be bought without paying brokerage.

''You can even buy options over ETFs there,'' Hamm says.

But he has several locally based ETFs as well. A favourite is the BetaShares Agriculture ETF (ASX code QAG) which covers corn, wheat, soybeans and sugar and is hedged against currency movements. It has jumped 8 per cent in the past month.

Because it uses a complex series of derivatives such as futures contracts it also earns interest and so pays out an annual distribution. There's an annual management fee of 0.69 per cent.

But the trader still lurks within. Hamm sold out at its peak and bought back in when the price dropped to where it had originally been, then more in 2012 when it fell another 20 per cent. ''It was a trading opportunity that was worth it.''

He also quit Vanguard's unlisted bond fund and moved to its Australian Government Bond Index (VGB), cutting the management fee from 0.75 per cent to just 0.20 per cent a year.

''ETFs are a good alternative to managed funds because of their low fees. My starting point is using ETFs to get diversification and holding them long term.

''Diversification comes first, then I might have a view on that asset class,'' Hamm says.

Loss a harsh lesson

Self-directed investor Vish Teckchandani (pictured above) lost money on an ETF when it suddenly folded.

Teckchandani, 28, was an early convert to ETFs having been a day trader - he had held his first stock for less than a week.

But he switched his focus from very short-term trading to the medium to longer term ''because you can't trade shares while working full-time. I got interested in ETFs working as a journalist for a financial services-related publication,'' Teckchandani says.

His first ETF was SPDR's ASX 200 (code: STW), one of the first ETFs and easily the largest, but he was hooked when ETF provider iShares offered international markets.

''I thought they were funky products at the time. They got me fascinated,'' he says.

But it was in the now defunct provider Aii's energy ETF, which he'd seen as a good play on the oil price without taking the risk on specific stocks, where he came unstuck. He bought units in February 2013 only to see it frozen and delisted four months later.

The ETF was shut down because it failed to reach critical mass and was faced with jacking up its fees to continue.

''I was forced to crystallise a 5 per cent loss on the trade. It's never good to be forced to crystallise a loss. Although it was redeemed at a fair price it was just at a bad time for me,'' Teckchandani says.

''I had no comeback but the silver lining was the lesson in it. The risk in ETFs doesn't start and stop at their underlying investments.''

The experience hasn't put him off ETFs but he warns you need to be ''cognisant of the business risk''.

''Ask yourself is the ETF going to be sustainable? Will it grow? How much assets does it have?''

For his latest investment, in Perth Mint Gold (PMGOLD), he even grilled the provider.

''It only has $54 million in assets but it's been around a long time. He said the profit from fees is more than the costs,'' says Teckchandani, satisfied.